The Two Cent Budget Fix

By Michael Medved

Posted on
January 23, 2013

If the president called instead for a genuine program of shared sacrifice, he could rally support from moderates and pragmatic conservatives and make serious progress in reducing the devastating deficit. With no other alterations in projected federal spending, an increase in taxes of 2 percent across the board (yes, including corporations), combined with a cut in spending and benefits that also subtracted 2 cents on the dollar, would yield deficit reduction of $400 billion this year—four times as much as the mandated sequestration cuts scheduled for March, and nearly seven times as much as the combined tax hikes in the fiscal-cliff deal. In fact, if applied for a full decade, the 2 cent fix would easily top the $4 trillion in total deficit reduction the president declared as his ultimate, visionary goal. It would move the country nearly all the way back to the normal, post-war spending-to-revenue ratios that applied as recently as 2007—19.5 to 18.3 percent of GDP. This compares to the unprecedented imbalance of last year, which saw spending at 24.3 percent and revenue at just 15.8.

In part, this notion for a quick fiscal repair takes its inspiration from a provocative 2003 book by progressive commentator (and former Clinton administration aide) Matthew Miller. In The Two Percent Solution, Miller suggested a slight tax increase on nearly everyone to fund bold new programs to provide universal health coverage, better schools, and more generous salaries for the working poor. He called for increases in overall spending, not cuts, and hardly worried about the deficit—which amounted to $158 billion in 2002, or less than one-eighth the figure of last year.

In the intervening decade, we’ve increased spending by much more than 2 percent—raising expenditures as a percentage of GDP by 5.4 percent (18.9 to 24.3) between 2002 and 2012. Many of those trillions paid for ambitious efforts to solve the same problems Miller identified—inadequate health insurance, failing schools, and income inequality—with almost entirely dismal results. In the process, our leaders (of both parties) helped to generate a fresh crisis of crushing debt that rightfully overshadows all other current concerns.

If a new 2 cent fix actually addressed that problem, most Americans could conceivably accept the pain and discomfort associated with higher taxes and lower benefits across the board—especially if the financial pain came with a sunset provision and applied for only a limited period, like five years, in order to cope with the present emergency.

At the upper end of the income scale, a family with $500,000 in combined taxable income could expect to pay an additional $10,000 a year to Uncle Sam—an obnoxious prospect to be sure, especially after prior tax hikes on the rich imposed by the Obama administration, but not a crippling blow to a privileged standard of living.

At the other side of the great divide, an average Social Security recipient gets $1,230 per month and so might give up $24.60 each month, or $6.15 per week—a real sacrifice for a retiree on a limited budget, but for most all pensioners a less-than-catastrophic cutoff. If the alternative to slightly reduced benefits involved the possible collapse of the whole system of Medicare and Social Security, wouldn’t the great majority of seniors prefer a viable program with reliable checks? By the same token, a family of four that receives food stamp-benefits (through the Supplemental Nutritional Assistance Program) gets roughly $630 per month. A decline of $12.60, or $3.15 per week, certainly counts as unwelcome but wouldn’t prove likely to induce starvation.

On the left, any version of the 2 cent fix would provoke impassioned protests over nickel-and-diming the neediest, most dependent Americans, but if we really do mean to distribute burdens equally on all then it hardly works to protect some groups while punishing others. A long-term, credible budgetary solution should never show the government playing favorites and advancing the interests of selected segments of the population, no matter how deserving. Since every family will enjoy the long-term benefit from a comprehensive repair of the fiscal wreckage then all should contribute to the short-term cost.

If the president proposed any such all-encompassing solution to the deficit dilemma, Republicans might instantly complain that the resulting ratio of revenue increases to spending cuts looked utterly unbalanced: since the overall economy generates four times more than the federal government now spends, increasing taxes by 2 percent of what that economy produces will yield four times the dollars as cutting spending at an identical rate. But the 2 cent fix would prevent the politicians from using that added revenue for new spending, since expenditures must decline under the plan rather than rise. Even the most profligate politicians would be forced by legislated limitations to apply every new penny for cutting deficits and, ultimately, reducing the debt as a proportion of GDP.

No one could argue that the 2 cent fix amounts to a permanent cure for our multifarious economic ailments since it’s based on an existing system that’s become clearly dysfunctional. A slight increase in taxes and a corresponding cut in spending and benefits can’t substitute for needed radical reform–of the grossly inefficient tax system, out-of-control entitlements and a bloated, duplicative federal bureaucracy.

But cutting the deficit by half would at least provide some budgetary breathing room so Congress and the president could debate those systemic changes in a more favorable, less menacing climate. The 2 cent fix could declare a truce, not demand definitive surrender from one side or the other, in the eternal battle over the size and scope of government. Democrats could go along with the scheme without admitting that benefits are unsustainably high, while Republicans agree to the fiscal band-aid without conceding that taxes are unrealistically low.

Would President Obama ever consider a budgetary rescue that truly required every American to give up something for the greater good? Almost certainly not, because he’s shown no indication that he’s ready to set aside ideological battle for the sake of pragmatic progress. On guns and immigration, as well as the unending fiscal fights, he seems determined to crush his partisan opponents, or at least to discredit them, rather than moving toward the center in search of common ground.

But even if the president refuses to budge in his refusal to negotiate, Republicans could help themselves as well as the country if they began talking seriously about the feasibility of universal sacrifice to cut the Gordian knot of current entanglements. As the Simpson Bowles Commission concluded more than two years ago, Washington needs to escape the weary, polarizing, sterile, either/or debate of revenue increases versus spending cuts, and acknowledge that any realistic improvement demands both. We will continue to lurch from crisis to crisis, and confrontation to confrontation, until the president, or charismatic leaders of the opposition, begin to build momentum for the idea that accepting wide-ranging discomfort in the present offers the only real alternative to risking systemic disaster in the future.